The National Projects December 2019 Population and GDP (2020E data) The long and winding road Population 146.8 GDP, Nominal, US$ bln $1,781 Plans are worthless. Planning is essential” GDP/Capita, US$ $12,132 Dwight D. Eisenhower GDP/Capita, PPP, US$ $27,147 Source: World Bank, World-o-Meters, MA The National Projects (NP) are at the core of the Russian government’s efforts to pull the economy out of the current slump, National Projects - Spending* to create sustainable diversified long-term growth and to improve Rub, Bln US$ Bln lifestyle conditions in Russia. It is the key element of President Putin’s Human Capital 5,729 $88 effort to establish his legacy. Health 1,726 $27 Education 785 $12 We are now initiating coverage of the National Projects strategy. We Demographics 3,105 $48 will provide regular detailed updates about the progress in each of Culture 114 $2 the major project sectors, focusing especially on the opportunities Quality of Life 9,887 $152 Safer Roads 4,780 $74 for foreign investors and on the mechanisms for them to take part. Housing 1,066 $16 ▪ What is it? A US$390 billion program of public spending, designed Ecology 4,041 $62 to stimulate investment, build infrastructure and improve health Economic Growth 10,109 $156 and well-being by 2024, i.e. the end of the current presidential Science 636 $10 Small Business Development 482 $7 term. Digital Economy 1,635 $25 ▪ Is this a return to Soviet-style planning? For some of the NPs, Labour productivity 52 $1 Export Support 957 $15 especially those involving infrastructure, it certainly looks like it. Transport Infrastructure 6,348 $98 For others – such as the SME and high-tech projects – there are Total 25,725 $396 clear nods towards the market economy and an apparent Source:Government of the Russian Federation recognition that future growth lies in rebalancing the economy. * converted using the Ruble-Dollar rate of 65.0 ▪ What’s different this time? The lack of any realistic alternative to Base Case Macro Scenario* promoting economic growth and the pressing need to improve 2020E 2021E the well-being of the population is sharpening officials’ minds. Growth, real % YoY 1.8% 2.4% CPI - year-end, % YoY 3.6% 3.8% ▪ Off to a flying start? Not really. There has been much criticism of Central bank key rate, % 6.00% 5.50% delays in starting the program properly. However, an initiative of Retail sales, % YoY 2.0% 2.4% this size and significance takes time and work to launch and much Real disposable inc., % YoY 0.6% 0.9% of the criticism is premature. We will have a better view on Budget, balance % of GDP 1.0% 0.8% Current account, % GDP 3.9% 3.4% progress by the summer of 2020. RUB/US$, year-end 65.0 65.0 ▪ Who’s in charge? President Putin announced that Prime Minister RUB/EUR year-end 74.0 73.0 Urals, US$ p/bbl, average $56 $55 Dmitry Medvedev would have overall responsibility. Each project Source: Macro-Advisory Ltd estimates under the National Project’s umbrella has designated officials at Refer to Russia Macro Monthly for more detail all meaningful levels responsible for successful delivery. Deputy * based largely on expectations for NPs PMs have key roles and have been given focused KPIs. Optimistic Case Macro Scenario* ▪ Will the targets be achieved? The National Projects program is 2020E 2021E very ambitious and has started slowly. It is unlikely that all targets Growth, real % YoY 2.3% 3.0% will be met. However, some projects will succeed and if the CPI - year-end, % YoY 3.3% 3.1% President can show ‘significant progress’ by 2024, the NPs will be Central bank key rate, % 5.50% 5.25% considered successful. It is probably more realistic to regard the Retail sales, % YoY 2.6% 3.5% Real disposable inc., % YoY 1.0% 1.4% NPs as an 8-10 year program, rather than a 5-year one. Budget, balance % of GDP 2.5% 3.0% Current account, % GDP 5.0% 4.5% ▪ What are the opportunities for international companies? Despite RUB/US$, year-end 61.0 60.0 calls to keep the NPs totally ‘Russian’, the government realizes RUB/EUR year-end 69.0 68.0 that some of the projects require considerable input from Urals, US$ p/bbl, average $80 $88 Source: Macro-Advisory Ltd estimates international companies to succeed. This is the area we will focus Refer to Russia Macro Monthly for more detail on in the regular bespoke analysis. * based largely on expectations for NPs No warranties, promises, and/or representations of any kind, expressed or implied are given as to the nature, standard, accuracy, or likewise of the information provided in this material nor to the suitability or otherwise of the information to your particular circumstances. Macro-Advisory Limited does not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the content contained in this note. © Copyright Macro-Advisory Limited The National Projects Snapshot The National Projects comprise a wide program of sub-projects – some 4,000 in all over the lifetime of the program – and the large-scale disbursement of funds means that the landscape is constantly changing. The table below indicates the situation as of early November 2019, restated in US dollars. The projects are ranked in terms of expenditure in 2019, which gives an early picture of leaders and laggards. The final column is a subjective assessment (low-medium-high) of the likely interest that the contents of each projects will offer to multinational companies. National Projects: Allocations, Spending, Foreign Interest Plan (US$ billion) Allocation (US$ billion) % Spent Foreign Interest 2019-24 2019 2019 Total 390.6 26.8 56% H Demography 47.0 7.9 83% L Science 9.6 0.6 74% H Healthcare 25.8 2.4 71% H Culture 1.7 0.2 69% M Safe Roads 71.9 2.0 67% H Education 11.8 1.6 66% H SME 7.2 0.9 60% H Housing 16.0 1.6 60% H Labor Productivity 0.8 0.1 50% M Exports 14.4 1.3 45% H Infrastructure 95.6 5.7 43% H Ecology 60.8 0.9 27% H Digital Economy 28.0 1.6 16% H Source: Ministry of Economic Development Why the delay? The above data shows the allocations for the whole period and for 2019, as well as the percentage of 2019’s spending for which government tenders had been published as of the time of going to press. The primary reason for the low implementation for some projects was given by the relevant ministers as a lack of cooperation from other departments. Tender documents had been drafted and submitted to relevant departments, including the Ministry of Finance, for final clearance. This is a standard procedure for all government spending, and the ministers responsible for some projects were complaining that they had not received the necessary sign-offs from other departments. At a meeting to discuss this issue, President Putin was highly critical of this excuse in the televised part, and probably even more so off-camera, threatening the ministers and deputy prime ministers with “personnel decisions” if they were unable to push and lobby other departments to sign off on their documents. Paralyzed by fear? We have also heard suggestions from some sources that there is some ministerial paralysis because of the high attention paid to the National Projects and their novelty. Because they are new, there are no precedents to fall back on and ministries are nervous about making a decision without a clearer signal about how to proceed. The high profile of these projects mean that mis-steps will be highly visible and potentially career threatening. This means that officials would rather sit on papers rather than take the risk of a decision which might hurt them, preferring to wait for someone else to take the responsibility. Our sense is that Putin’s intervention was designed to remove this option. 2 The National Projects Division of overall allocation Emphasis on infrastructure. The chart below shows the allocations made under the National Projects. There is a clear emphasis on infrastructure projects, with substantial funds allocated to improving road safety and to the improvement of so-called ‘core’ infrastructure – roads, railways and the electricity grid. Not all of this spending is genuinely additions – i.e. over and above what the government planned to spend anyway but the amount allocated do represent a significant increase in planned spending over the next 5-6 years. National Projects: Allocations Sector-Wise Source: Russian Government, Macro-Advisory Ltd. 3 The National Projects Summary Design and Implementation. Each National Project consists of several Federal Projects, which are typically broken down into regional projects, of which some 4,000 have been designated for support. The exact list of projects to be supported has been a topic of fierce debate ever since – and probably before – the announcement of the NP program, with federal and regional ministers and officials all competing for support for their pet projects. This factor alone has hindered the speedy take-off of the NP program. Thus, all levels of Government are involved in the implementation of national projects. Is this just state planning? It is true that much of Russia’s industry and commerce lies in state hands. Estimates vary but some commentators believe that state companies control up to 70% of the economy. Viewed in this context, the National Projects could be seen simply as a reincarnation of Soviet state planning, designed to benefit state-owned companies.